High-yield, speculative-grade bond exchange traded funds have been steadily gaining momentum, even outpacing the equities market.
Over the past three months, the iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) rose 3.3% and the SPDR Barclays High Yield Bond ETF (NYSEArca: JNK) gained 3.4%, whereas the S&P 500 Index dipped 0.4%.
Some market observers see the divergence between junk bonds and stocks as either foreshadowing a bump higher for the S&P 500 or a snap back in high-yield debt, reports Chris Dieterich for the Wall Street Journal.
Junk bonds have usually mirrored the stock market trends. In recent years, junk bond slips were usually followed by stock market declines while both junk bonds and stocks rebounded together in February and both moved in unison after the June’s Brexit vote.
SEE MORE: Waiting for Junk Bond ETFs to Breakout
Consequently, some argue that the recent strength in junk bonds is a good sign.
“It’s generally thought that between the two asset classes, junk bonds lead stocks, and if that’s the case, the equity market is due for some catch up on the upside,” analysts at Bespoke Investment Group said in a note.
Supporting the junk bond market’s recent run, the rebound in oil prices could have bolstered the outlook on highly indebted energy companies or diminished credit risk among oil and gas producers. The plunge in crude oil prices have weighed on speculative-grade debt in prior years as investors dumped the asset on concerns of widespread defaults.
“Prior periods of weakness in HYG over the last two years have led to similarly meaty declines in the [S&P 500],” Frank Cappelleri, a technical analyst at brokerage Instinet, told the WSJ. “That [weakness in junk]has yet to happen, hence, the equity market’s continued buoyancy thus far.”
For more information on the speculative grade debt market, visit our junk bonds category.
iShares iBoxx $ High Yield Corporate Bond ETF